Quick Update: ASC 842 Deferral (Private Companies)
By Mazars Real Estate Group
December 16, 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (Topic 842) with the initial intent of having public and private companies implement the new standards at the beginning of the 2019 and 2020 calendar years, respectively.
A few fundamental changes mandated by this ASU include balance sheet recognition of lease assets and liabilities related to operating leases as well as changes in the definition and classification of leases.
While the change aims to increase transparency in financial reporting, many companies have faced practical difficulties and increased costs in the application of the new standards. Based on this feedback from public companies, the AICPA urged the FASB to consider delaying the effective date of the ASU for an additional year for private companies.
The FASB issued an exposure draft on August 15, 2019 and proposed to postpone the required implementation for private companies by one year, with an effective date of fiscal years beginning after December 15, 2020. The FASB issued this exposure draft to solicit comments from the public on the changes in this ASU with the due date of September 16, 2019. In November 2019, the FASB issued ASU 2019-10 allowing private companies to defer implementing ASC 842 until fiscal years beginning after December 15, 2020.
Issues that public companies have faced in implementation include:
- Lack of educational materials (or lack of awareness of these materials).
- Increased costs of lease accounting software.
- Determination and identification of embedded leases within larger agreements.
- Difficulties pertaining to comparative period reporting.
- Additional time needed in ascertaining the effects on debt covenants and renegotiating the new agreement with lenders.
- Significant additional resources needed to implement the new standard.
The deferral of the implementation of ASC 842 furnishes private companies with much-needed time to resolve the complex issues outlined above, as well as a longer span of time in which software costs may decline.
It may be beneficial for those companies that were preparing for the initial January 2020 implementation date to conform to the new standards early. This will give companies an additional full year to understand the implications of the changes, as well as an opportunity to exercise a year-end close of accounting records under the new standard.